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Where Europe and Central Europe are Heading?

English Pages, 19. 1. 2010

Thank you for the invitation to come and speak here. You have been inviting me in the past but I always found some “presidential” excuse. It is good to be finally here.

I attended many conferences devoted to the economic issues of Central and Eastern Europe in the 1990’s. At that time Central and Eastern Europe had a special meaning, had a unique, truly historic task, and was inspiring – both intellectually for the economists and other social scientists and economically for potential investors and business people. It was a region of relatively easy investment opportunities, of high and fast profits, of large-scale privatizations. On our side we wanted to attract foreign businesses and investors and that motivated us to make speeches at such conferences.

It is different now. It can be argued that Central and Eastern Europe ceased to be a distinctive entity. Its systemic change from communism to a free society has been basically completed, most of its countries have become members of the EU and of NATO, and parliamentary democracy and a market economy are both there.

The Central and Eastern European countries are, of course, at a lower level of economic development than most of the countries in Western Europe but I am not sure it makes them specific in any meaningful sense. The GDP per capita difference between Austria and the Czech Republic is not bigger than the difference between Ireland and Portugal or Greece. Not to speak about the differences between the north and south of Italy or between Paris and the French countryside.

Individual cases of residual privatization in some countries of the region could be a motivation for some of you to be active there now but the era of large-scale privatization is over. At least in my country there are not many companies left for privatization.

The reason for interest in this region might have been a higher level of economic freedom in some of the countries but it was a more relevant argument in the 1990’s. To my great regret, it is not true now. The widespread import of EU legislation makes the region less free than it used to be 10 years ago. 

With Western Europe there are more similarities than differences. The countries of Central and Eastern Europe have already become “normal European” countries, which is a mixed blessing. I am rather unhappy with the current “European normality”.

I was hoping we were going to avoid some of the well-known European faults and defects, because our past, our experience with communism, was – or should have been – a sufficient warning. I thought we were going to say no to the German and Austrian “soziale Marktwirtschaft”, to the French leftist etatism (dating back to the times of Colbert), to the British labourism, which is one of the variants of the slippery third ways, to the over-generous Scandinavian paternalism, to Cohn-Benditian aggressive environmentalism, and to the Brusselian Europeanism. I thought we were going to take the road to classic parliamentary democracy and market economy.

It did not happen. We have not avoided these European features. That is why we are solving, and regretfully often not solving, the standard European problems:

- the economically undefendable degree of income redistribution which leads to high taxes and to an enormous power of the state and its representatives;

- the unproductiveness of the paternalistic welfare state which does not motivate people to work;

- the existence and the dangerous growing of unsustainable deficits of public finances;

- ageing of the population, combined with the rigidity and inadaptability of the pension systems;

- the inability to find a viable system of financing the more and more expensive health care in which the expenses are paid by the third party, not by the patient;

- the impossibility to rationally finance education, caused by the artificial and mostly useless prolonging of the length of studying on the basis of mistaken concepts about what it means to be well-educated. The result is the decreasing quality of education;

- unmanageable and uncontrollable massive immigration, which is a logical consequence of the fashionable and politically correct concepts of multiculturalism and humanrightism and of the generous European social system;

- weakening, if not disappearance, of the identification of people in Europe with the key, indispensable, natural and authentic social entity called the nation state (or state built around a dominant nation).

Each one of these trends is an imminent threat to all of us. And it bothers me.

It takes me to the current financial and economic crisis. It came as a surprise for most of the economists, for all the politicians, as well as for the public. Almost nobody expected it. The people shared the belief in the omnipotence of central banks and governments to control the macroeconomy and in the feasibility, rationality and productiveness of microeconomic regulation, especially in the financial and banking sectors. As a true believer in the Austrian school of economics, I have to say that they were led into the “Road to Serfdom” so convincingly described by great Austrian thinker Friedrich von Hayek.

This belief was proved to be wrong. The economists slowly began to understand the causes of the current crisis which happened as a consequence of a combination of failures. To search for one simple reason is a mistaken strategy. On the macroeconomic side, it becomes more and more accepted that the origin of the crisis was connected with the unprecedented build-up of imbalances in the world economy, with the unusually long period of low real interest rates and of excessive money supply and with political playing with the mortgages. On the microeconomic side, it became clear that the existing partial and very imperfect regulation did not help. On the contrary, it distorted the rational behaviour of banks and other financial institutions and motivated them to look for ways to escape it by means of various “financial innovations”. 

It is necessary to warn against the attempts to once again blame problems in the market as problems of the market. The current crisis was not the result of a market failure or of any inherent deficiency of capitalism. It was a government failure, resulting from the immodest ambitions to insensitively intervene in such a complex system as society and economy. Ludwig von Mises and Friedrich von Hayek should be reread again and again. The crisis was certainly not caused by Keynes’s lack of “effective demand”, i.e. by the lack of consumption or investments on the part of private economic agents, and therefore can’t be solved by governments ready to supplement the deficiency of effective demand according to Keynes’s recipes. Government actions and interventions caused, prolonged, and dramatically worsened the crisis.

It will sooner or later be over. The long term damage, however, will stay. The adversaries of the market have managed to create a far-reaching mistrust in the system, but this time not only in the free market capitalism, in the laissez-faire system, in the capitalism of Adam Smith, Friedrich von Hayek and Milton Friedman, as it was the case 70-80 years ago, but in the highly regulated capitalism of the current era. And this is disturbing.

As a small and highly open economy the Czech Republic could not isolate itself from the visible slowdown of the world economy and particularly from the recession in the countries of our main business partners. Our GDP fell down by some 4% in the year 2009.

We were lucky that our banking and financial system had not been overexposed to bad loans before the crisis, which helped and helps. We also had a big advantage in our own currency. The exchange rate of the Czech crown fluctuates; it is not a constant fixed for ever. The small open economies which accepted Euro as their currency, or are firmly attached to Euro through various rigid monetary arrangements, have been more affected by the current world-wide crisis. That was almost a laboratory experiment.

Today’s recession has also proven the textbook’s truth of a very high correlation between the decrease in GDP and in state budget revenues. Speaking about the Czech Republic, I am not so much afraid of the problems of its real economy, of its business sphere. The economy will surely – relatively soon – return to its natural dynamics. But I am afraid of the way as well as of the timing our public finance problems will be addressed. I hope the parliamentary elections in May will make it possible to form a government able to do it or at least able to understand the scope of the problem and of its potential consequences.

Another topic I would like to touch here today is the doctrine of the climate change and the role it has in shaping our societies. It deserves to be called a doctrine, because its connection with science is very loose.

After studying this issue for years, after publishing a book with the title “Blue Planet in Green Shackles” (with the subtitle “What is Endangered: Climate or Freedom?”) which has already been translated into 14 languages, I can say that I don’t see any problem with the climate now, or in the foreseeable future. The current dispute is not about temperature and/or CO₂, but about a new utopian vision of the world. It is an ideological clash between those who want to change us (rather than the climate) and those who believe in freedom, markets, human ingenuity, and technical progress. It is a dispute about us, about people, about human society, about our values, about our habits, about our way of life. Temperature fluctuations are only an instrument, not a real object of interest for those who play that game.

The available evidence tells us quite convincingly that: 

a) The warming we witness is not global. It materializes in the cold, but not in tropical regions, in dry, not wet areas, in the winter, not in the summer, and during the nights, not during the days. 

b) The warming is not large. The average global temperature increase in the whole last century was only 0.74 °C. In addition to it, the climate stopped warming more than a decade ago altogether. The temperature now is similar to the temperature in the year 1940, regardless of a huge increase in CO₂ emissions. 

c) The warming is not unique and unprecedented. The temperature in the Medieval Warm Period and in many other moments of history was higher than it is now.

d) The mild warming we experience is not dominantly man-made or CO₂-made. There are many other factors influencing the temperature and climate and the whole very complex climate system is still full of major uncertainties. 

To block economic growth by making it more costly – and this is the substance of environmentalism and of global warming alarmism – is a wrong and unacceptable strategy. We should resist it with all our strengths. History tells us that greater wealth and the unhindered developments of technology profoundly increase our ability to cope with all kinds of problems, including potential climate fluctuations. We should believe in human adaptation, in technical progress, in the rationality of free people. It is not necessary to make decisions for future generations. Individual freedom now and in the future, not the wisdom of governments, is the key. 

Let me conclude by a few remarks about the European Union. On the one hand, I came here as “President of the Czech Republic”. On the other, by signing the Lisbon Treaty, the Czech Republic ceased to be an independent state. I am merely the President of one of the constituting elements of a recently formed European state. It was not always so.

Originally, in the 1950’s, the leading idea behind the European integration was to friendly cooperate, instead of making wars, to liberalize, to open-up, to remove all kinds of barriers at the borders of countries, to enable free movement of goods and services but also of people and ideas around the European continent. It was a positive concept for most of Europeans and should have a chance to continue and be promoted by all of us who have liberal (in European terminology), that is not statist or nationalistic, Weltanschauung. 

To my great regret, this is not the case now. The situation began to change in the 1980’s and the decisive breakthrough came with the Maastricht Treaty in December 1991. By that time, integration had turned into unification, liberalization into centralization of decision making, into harmonization of rules and legislation, into the strengthening of European institutions at the expense of institutions in member states, into post-democracy. Freedom, democracy and democratic accountability, not to speak about economic efficiency, entrepreneurship and competitiveness have been weakened. Democratic deficit keeps growing.

The almost ten years old European dispute about the European Constitution (currently called the Lisbon Treaty) ended in November last year, when I signed it. It was the dispute between those who wanted to go ahead with this freedom and prosperity endangering process and those who wanted to interrupt it.  This is the way we, who spent most of our life in a very authoritative and oppressive communist regime, feel it and why we try to warn against it.

Thank you for your attention.

Václav Klaus, The 15th Central and Eastern European Forum, Vienna, Hilton Hotel, 19 January 2010